As you probably know, the tax reform package which President Trump will soon be submitting to Congress eliminates the estate tax. What is the estate tax? Right now, if your assets exceed $5.5 million, everything over that threshold gets taxed at a hefty 40% rate when you die. For the very wealthy, this is a very good reason to put in place an estate plan that can eliminate or lessen that tax burden.
But as it stands now, the estate tax certainly does not impact me, and probably does not impact many of you. Do you have that kind of money? So the only people affected by President Trump’s plan – and the only ones benefitting from it — are the elite: the 1% of 1%.
But given that estate taxes probably do not affect you, do you still need an estate plan? You absolutely need a plan. There are many, but here are 3 good reasons why you need a plan regardless of the proposed tax changes.
The estate tax changes with every administration. Just under 10 years ago, the estate tax threshold was only $1 million. So if you had some equity in your home and a life insurance policy or two, there was a good chance you would need protection against the estate tax. Even if President Trump abolishes the estate tax now, there is no guarantee it won’t come back at the old level with the next administration. In other words, you have to prepare for the estate tax whether it currently affects you or not.
The real threat to your estate if you do not have a good plan is not estate taxes, but probate. If you have nothing in place, or even if you have just a will, your family will have to go to court to get to your estate. This is called probate. Even if there is a will and it is clear and the estate is simple and no one contests the proceedings (big “ifs”), the process will take months (the creditors have to have their shot at the estate, too). If there is a contest (this happens in families where one would never expect it), the probate will be even longer (and more expensive). On average, the court costs, bond and lawyer’s fees will amount to 5% of the estate. If the court feels the need to appoint a trustee, he or she along with the creditors could eat up the entire estate.
So let’s do an example using the simplest scenario: Let’s say your house is worth $300,000 (probate looks at total value, not equity), and you have stocks worth $50,000, and you have a retirement account worth another $50,000, and you have 20,000 in the banks. The probate estate is $420,000. 5% of that is $21,000. That’s what your family would lose in a simple probate. Imagine what the cost of probate would be if there are complications. The only way out of this nightmare is a trust-based estate plan that keeps you out of court altogether.
It is becoming more important to plan for incapacity than for death. Medical science has done wonders in keeping us alive longer, but not quite as well when it comes to quality of life. In other words, we will live longer, but we may not be in great shape. Already, 2/3 of Americans have some period of incapacity before they die. And tragedies are just as likely to result in incapacity as death. Incapacity is not addressed by a will. Without a trust-based estate plan dealing with your incapacity, the fate of your family and your business would lie in the hands of a judge who does not know you at all. The determination of your competence and the subsequent court proceedings to appoint a conservator and guardian are generally lengthy, expensive, and bloody. And in the end, your family may be paying a court-appointed stranger to determine if and when your family gets access to the wealth you’ve accumulated to benefit them. Another nightmare which can be avoided only with an estate plan.
In short, there is no way of knowing whether estate taxes will be a factor when it comes to distributing your estate. And it is wise to plan as if they may be.
But the reasons for putting together a trust-based estate plan extend well beyond estate taxes.